Q&A talks about the state’s fledgling captive insurance industry with Thomas Hodson, president of the Connecticut Captive Insurance Association.
Q: The Connecticut Captive Insurance Association (CCIA) was formed in 2011 with the passage of Connecticut’s new captive insurance law. What is captive insurance and what was behind it coming to Connecticut?
A: Captive insurance is, essentially, formalized self-insurance for businesses. It is a meaningful alternative to traditional insurance coverage. A captive is an insurance company created to insure the risks of its parent, or parents, and affiliates. The parent can be a business, an association, or group of businesses. Owning a captive can greatly improve its owner’s ability to control business risks and potentially return significant profit back to the parent.
Connecticut is a logical domicile of choice for captives. As a result of the state’s 200-year history as the “Insurance Capital” in the U.S., insurance-based intellectual capital is a major resource in Connecticut. Naturally, some of that intellectual capital has been drawn to the alternative risk market and Connecticut has, for many years, been home to a significant number of the top service providers, fronting carriers and reinsurers already serving the captive marketplace.
Q: What has been the interest in Connecticut in establishing captive insurance since the law was passed? What has helped or hindered the establishment?
A: I have to credit Gov. Dannel Malloy, state Sen. Joseph Crisco, Insurance Commissioner Thomas Leonardi and Department of Economic and Community Development Commissioner Catherine Smith for being the main drivers behind the recent interest in captive insurance in Connecticut. Leonardi has told me on several occasions that one of the first tasks the Governor asked him to focus on after being hired was to help establish Connecticut as a domicile for captives.
To help accomplish this, the state took two key steps. First, the legislature passed a state-of-the-art captive law. Second, Leonardi created a separate division within the Insurance Department to regulate captives, lead by John Thomson, an industry veteran with more than 30 years experience analyzing, creating, advising and managing captives. These two steps, by themselves, help to set Connecticut apart from many captive domiciles. I think the state is quickly becoming a domicile of choice in the United States.
In terms of the recent interest in captive formations in Connecticut, the state has been very active. The interest is coming from many different constituents, from large Connecticut employers interested in bringing their captives home, to mid-sized companies looking to take advantage of more innovative captive structures to give themselves an edge.
Q: What are some of the reasons companies would turn to captive insurance? Are the financial advantages that great? What might be holding some companies back from establishing captive insurance?
A: The advantages offered by a captive insurance program include control over business risk, returning an underwriting profit to its parent, and potential tax benefits. The ownership of a captive allows the parent company to customize insurance products and underwriting standards to fit the specific circumstances of the insured, particularly in cases where coverage might otherwise be unavailable or prohibitively expensive.
Ownership of a captive also allows for the utilization of advanced risk management and loss control strategies, reducing claims and litigation costs. In some circumstances, the captive’s direct access to reinsurance markets may reduce the cost of transferring risk and allow the parent to benefit from favorable loss experience enjoyed by the captive.
Finally, captive insurance may provide a tax benefit to the parent since premium payments to an insurer, including a captive, are permissible business expenses that may be used as an offset to taxable corporate profits. Additionally, a captive’s parent can receive a tax benefit by accelerating the deduction for losses through the establishment of the captive’s reserves.
Q: How is captive insurance affected by Obamacare?
A: We are seeing significant interest from across the market as captive insurance is being increasingly viewed as a viable option for companies struggling to meet their obligations under the Patient Protection and Affordable Care Act (Obamacare). Captives are being established by employers to limit their healthcare risk and help provide options to employees. Connecticut employers, in particular, are well positioned to take advantage of this type of risk management vehicle. In fact, there has been so much interest in this issue that the CCIA is offering a session at its Oct. 2 symposium in Stamford to help employers address their Affordable Care Act obligations through a captive insurance program.
Q: A lot of the focus has been on Fortune 500 companies and their captives. Is captive insurance only a reality for larger multinational companies? Can smaller companies gain from forming their own captives?
A: Captive insurance companies were once considered to be outside the standard of risk management practices. However, within the past decade or so, most if not all major corporations have either utilized captives or actively considered the feasibility of captives. However, with new captive insurance structures developed in the last few years, captives are now a mainstream risk management alternative utilized by companies large and small. I predict that much of the growth in the captive market over the next few years will come from small to mid-sized companies taking control of their business risk by establishing captive programs.
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